"The airline business in crisis - an Agenda for recovery". What might have been - a memory from 2003

Plus ca change plus c'est la meme chose.

Dr Cheong Choong Kong, or CK or Doc Cheong as he was usually called, headed Singapore Airlines from 1996 until 2003. He was one of the few Asian airline giants to have emerged in the era of dominance by the full service flag carriers. His doctorate in mathematics was followed by important research in the area, appropriately, of random processes and applied and theoretical probability.

In 1998, Fortune magazine named him Asian Businessman of the Year, recording the fact that SIA had an "unbroken 27-year record of profitability through turbulent economic times." Singapore Airlines was one of the sixth freedom airlines that perfected the art of disruption in the latter part of the 20th century - to fierce opposition from most of the incumbent flag carriers.

Just before he retired from the airline business, CK Cheong made a farewell plea at the Jun-2003 Washington IATA AGM. As another annual IATA gathering rolls around, back in the US again, he could well - with a few minor adjustments - make the same presentation. This time however he would be considerably less optimstic about US liberalisation than he was 12 years ago. In arguing the case for liberalisation, Dr Cheong's 2003 presentation noted, with hope, that "that the US Government may relax its ownership restrictions to allow foreign investment of up to 49 per cent in its national airlines."

The following text is Dr CK Cheong's unedited presentation to the 2003 IATA AGM in Washington DC:

Ladies and gentlemen, good afternoon.

Over the last two or three years, we have seen a hive of activity in Asia on the ownership front as airlines seek investment for restructuring. The Chinese Government announced plans to allow foreign ownership of up to 49% in a Chinese airline; the Indian Government will allow 26% foreign ownership in Air India; the Sri Lankan Government has allowed Emirates to purchase 43% of SriLankan; and we heard from the honourable Norman Mineta this morning that the US Government may relax its ownership restrictions to allow foreign investment of up to 49% in its national airlines.

Today, with many airlines no longer state-owned and freer movement of capital across national boundaries, it is becoming more difficult to justify the existing bilateral system and restrictions on ownership.

I have been advocating liberalization for close to two decades, almost from the time I became an airline chief 19 years ago. I will retire in a week's time and I'm still tilting at the windmills, which shows you what a great success I've been! I have argued that liberalization of ownership rules is both desirable and inevitable. I'm still arguing because the inevitable can be a long time coming. Frankly speaking, the airline industry is sick, and not only sick but on life support. It needs major restructuring.

Consider the evidence. The aviation industry has never been known for good financial returns, nor for consistency of performance.

Even among the most profitable of airlines, return on shareholders' investment rarely exceeds 10 per cent. Yet few industries can rival the airline business for sheer profusion of players. In this mug's game, hardly anyone goes out of business.

In most industries, consolidation would be inevitable, with the weakest competitors allowed to disappear. Yet in many parts of the world, airlines are kept alive by public funds and protective regulations.

Dare I say, here, in this capitalist capital of the world, that the United States of America is no exception. What is more, despite its commitment to globalization, it still retains the archaic 25 per cent limit on foreign ownership.

This leads to an unhealthy business environment and endemic uneconomic pricing that in other sectors would be short lived. Add to this the other major characteristic of our industry, its capital-intensive nature, and it is little wonder that it produces such poor returns. The cynical among us would ask: "what returns?"

Who is responsible for this state of affairs, governments or airlines? The answer is both. Like a quack doctor, governments issue palliatives to the airlines that address the symptoms but not the malaise.

The airlines, desperate for short-term survival, are only too happy to accept them, avoiding painful but necessary restructuring. Governments are responsible for our ridiculous system of bilateral aviation agreements and restrictions on airline ownership. It was an anachronism two decades ago, more so now. Governments must be held accountable for moving at a snail's pace in dismantling the system.

The most damaging part of the system is the restriction on ownership that deprives ailing airlines of the oxygen for survival - namely, capital investment. The irony is that at the same time, governments are demanding higher levels of investment by airlines in new equipment, to meet ever-tighter safety, security and environmental regulations. Something has to give, and since it cannot be standards, ownership rules must go.

The benefits of consolidation are obvious to many of us: a bigger network offering route synergies and strengthening the frequent flyer programme, a common IT platform providing seamless travel to a larger number of destinations, and cost savings, to name a few. The consumer may not like it at first sight, but it would also mean economic pricing – not monopolistic or oligopolistic, but economic pricing that allows the investor to get a decent return on his investment.

The outcome is higher profitability and stronger balance sheets that will allow airlines to re-equip their fleets with more reliable and less polluting aircraft, and invest in ground and in-flight facilities that will make flying more pleasant. The industry will be healthier, the consumer happier. A healthier industry and more profitable airline companies should be welcome to labour, for it means bigger bonuses and greater job security.

For consolidation to work properly, restrictions on ownership of airlines should be relaxed, if not removed altogether. The time to start is now.

Some will argue that now is not the right time. "Right now we are struggling to keep our heads above water. Wait until the good times come again and we can talk." My argument is that the good times may not come again, and even if they do, they certainly will not last - unless we make these changes. Liberalization of ownership rules is not just nice to have.   

It is an absolute necessity.

Thankfully, there are signs that the message is beginning to be heeded. I do not believe that it is coincidental that the US is considering relaxing its ownership restrictions at the very time when its major airlines are teetering on the brink.

Could the United States be the catalyst for another change, one that is long overdue? If America truly believes in a globalized airline industry, it must now lead the push for open equity as well as open skies.

If it does, others will follow and I will be happy in my retirement.

Monday 2 June, 2003

(Postscript: CK Cheong is today Chairman of the OCBC Bank Ltd, so probably is happy in his retirement.)

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